In Japan, dividends, buybacks take the stage

MegumiFujikawa

TOKYO--For decades, Japanese annual shareholder meetings produced little for investors beyond freebies like the French pastries that Japan Tobacco Inc. handed out at its yearly gathering Tuesday. Now, pressure is rising on companies to deliver more.

A combination of forces, from the policies of Prime Minister Shinzo Abe to overflowing corporate coffers, is pushing Japanese companies to raise the historically meager returns they provide for investors. Executives have begun to respond.

Japanese companies in the Topix index of all companies listed on the first section of the Tokyo Stock Exchange had an average return on equity of 6% from 2003 through 2013, compared with 13.6% for those in the Standard & Poor's 500 and 12.6% for those in the MSCI World index, according to Bloomberg. Analysts say the figures, often used as an indicator of shareholder value, show that companies here still have ground to make up in rewarding their owners.

One source of pressure is Mr. Abe's economic revival plan, known as Abenomics. The prime minister on Tuesday formally unveiled legislative measures aimed at tightening corporate governance, including a so-called stewardship code for institutional investors that encourages them to monitor management more closely and to speak up for better returns.

Mr. Abe is pushing the biggest Japanese institutional investor, the Government Pension Investment Fund, to shed its conservatism and seek higher- yielding investments.

Another catalyst is a growing number of return-conscious foreign investors, who have shown renewed interest in Japanese stocks since Mr. Abe took over a year and a half ago. Foreigners and overseas institutions held a record 31% of Japanese stocks at the end of March, according to the Tokyo Stock Exchange, up from 28% a year earlier.

The quest for more dividends is prompting a slight uptick in public activism. During the current annual-meeting season, which peaks at the end of June, research firm IR Japan has tallied 15 formal shareholder proposals seeking higher returns for investors, including dividends and buybacks. While that is tiny given the 2,400-plus listed companies IR Japan tracks, it was the highest total ever, up from 10 a year earlier.

Behind the scenes, analysts say, more is happening. A greater number of investors are demanding increased dividends and share buybacks than they have seen before.

"I think this is going to be a much more interesting season for annual meetings," said Nicholas Smith, Japan strategist at the brokerage firm CLSA.

Japanese companies are already responding, partly because they are sitting on a record amount of cash: about $3 trillion at the end of March, when the most recent fiscal year ended, according to the Ministry of Finance. The companies have been helped by government policies that weakened the yen, lifting the value of overseas sales when converted into the Japanese currency.

Led by car makers like Toyota Motor Corp., more than half the companies listed on the first tier of the Tokyo Stock Exchange announced dividend increases for the fiscal year ended in March, according to Nomura Securities Co. In May, Amada Co., a machine-tool maker, took the extraordinary step of saying it would return all net profit to shareholders for the next two years, either through dividends or stock buybacks.

In addition to raising dividends, a number of large Japanese companies, including Toyota, NTT Docomo and Mitsubishi Corp., have announced plans for big stock buybacks, which improve shareholder returns by increasing the value of the remaining shares outstanding.

Kengo Nishiyama, an analyst at Nomura, estimated that total shareholder returns at the companies listed on the first section of the Tokyo Stock Exchange would total Yen11.4 trillion for the fiscal year that ends next March, up from Yen10.3 trillion a year earlier. This includes Yen2.2 trillion in buybacks and Yen9.2 trillion in dividends.

Still, return on equity stands at less than 9% for companies in the Russell/Nomura Large Cap Index of Japanese stocks, compared with an "international benchmark" of more than 10%, Mr. Nishiyama wrote in a note to clients as the peak day for annual meetings, Friday, approached.

He said he expected an increase in shareholders demanding higher returns. "The distinctive feature this year is likely to be the inclusion of shareholder proposals for share buybacks," he wrote.

Increased returns aren't the only thing Japanese shareholders are seeking. Other proposals include calls for limits on executive compensation, for the appointment of outside directors and for steps to promote environmentally friendly corporate practices.

Initiatives like these have been building, analysts say, since the accident at the Fukushima Daiichi nuclear power plant in 2011 prompted more Japanese people to protest what they saw as irresponsible corporate behavior and lax regulatory oversight.

"There has been a trend over the last few years, which will only accelerate this year, toward greater shareholder democracy," said Nicholas Benes, representative director of at the Board Director Training Institute of Japan, a nonprofit group that works to improve corporate governance.

While Japanese shareholders have traditionally been loath to challenge management, they actually have considerable rights. Under Japanese law, for example, shareholder proposals that have been approved are binding on a board. In the U.S., proposals are generally just advisory in nature.

Still, analysts say that shareholders in Japan remain far less demanding than investors in many other countries.

At Japan Tobacco, which owns cigarette and food brands, Children's Investment Fund Management this year for the third time appealed to management to raise its dividend and increase share buybacks.

The London-based hedge fund asked for a dividend of Yen150 per share for the current fiscal year, instead of the Yen100 that the company plans to distribute. It also asked the company to buy back 200 million shares, 10% of the total outstanding, within one year and to cancel the company's holdings of its own shares.

Japan Tobacco had already expressed its opposition to the request ahead of the meeting, saying such measures would restrict the company's ability to invest, undermining longer-term profit growth. The company says it has steadily increased shareholder returns for the past five years and that the amount it aims to pay out by December 2015 is comparable to targets at other global-consumer goods companies.

One shareholder leaving the Tokyo hotel where the meeting took place said she would be happy to have a higher dividend, but voted against the proposal because she thought it would interfere with the company's growth.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com and Eric Pfanner at eric.pfanner@wsj.com

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